Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member., inc. (CRM) Still Doesn’t Make Sense: Oracle Corporation (ORCL), International Business Machines Corp. (IBM)

Page 1 of 2

I’ve said it before and I’ll say it again, valuation will always matter. I’ll continue to say this even though I know that people who scream that ugly “valuation” word to high-flying growth stocks are often relegated to straitjackets. Nevertheless,, inc. (NYSE:CRM)‘s ascent to the top of the cloud discussion doesn’t justify its gaudy stock price. It didn’t make sense three years ago and it still doesn’t make sense today.

What are we really paying for?
While this company has done a good job building itself into a leading software as a service — or SaaS — entity,, inc. (NYSE:CRM) has not differentiated itself from the competition — at least not in a meaningful way. And with a forward price-to-earnings ratio of 73,, inc. (NYSE:CRM) is trading at a valuation that is six times the expected earnings of Oracle Corporation (NASDAQ:ORCL) and nine times that of Microsoft Corporation (NASDAQ:MSFT). Forward P/E uses estimated earnings to compare relative value among companies in the same industry., inc. (NYSE:CRM)Generally, the lower the forward P/E, the more undervalued a company is believed to be. Granted,, inc. (NYSE:CRM) has put up impressive growth numbers. But is the premium deserved? While investors are still pouring their hard-earned cash into this stock, it’s going to take a painfully long time for that value to be realized. And it’s not as if, inc. (NYSE:CRM) has been wooing the Street of late with its performance, including a marginal beat on revenue in the recent quarter — posting sales of $835 million versus consensus of $830 million.

What’s more, the company still struggles with weak profit leverage, as evidenced by a 32 basis-point year-over-year decline in non-GAAP operating margin. Likewise, full-year operating income of $357 million was a bit soft. Granted, it is 36% higher than fiscal year 2012. But it translated to a non-GAAP operating margin of just 11.7%. By contrast Oracle Corporation (NASDAQ:ORCL) posted a full-year operating margin of almost 40% and Microsoft posted 35%.

To be fair,, inc. (NYSE:CRM) has not arrived at the “mature” status of either Oracle or Microsoft. The operating margin performance could be due to the aggressive growth plans, which includes acquisitions. But the company’s practice of stock-based compensation for its executives can use a reform. This practice has eaten into profitability. While it’s not unusual for growth companies to adopt this policy, investors have to wonder how long this can last, and what exactly are they paying for?

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!